SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20109
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Kronos Incorporated
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2640942
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
297 Billerica Road, Chelmsford, MA 01824
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(Address of principal executive offices) (Zip Code)
(978) 250-9800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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As of January 26, 2002, 19,835,644 shares of the registrant's common stock,
$.01 par value, were outstanding.
KRONOS INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the Three
Months Ended December 29, 2001 and December 30, 2000 1
Condensed Consolidated Balance Sheets at December 29, 2001
and September 30, 2001 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 29, 2001 and December 30, 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
UNAUDITED
Three Months Ended
----------------------------
December 29, December 30,
2001 2000
------------- ------------
Net revenues:
Product .......................................... $ 35,214 $ 33,974
Service .......................................... 40,647 31,031
------------ ------------
75,861 65,005
Cost of sales:
Product .......................................... 8,454 7,772
Service .......................................... 20,546 17,945
------------ ------------
29,000 25,717
------------ ------------
Gross profit ................................ 46,861 39,288
Operating expenses and other income:
Sales and marketing .............................. 25,191 22,357
Engineering, research and development ............ 7,936 7,920
General and administrative ....................... 4,532 4,140
Amortization of intangible assets ................ 643 1,734
Other income, net ................................ (975) (1,153)
------------ ------------
37,327 34,998
Income before income taxes .................. 9,534 4,290
Income tax provision ................................... 3,337 1,501
------------ ------------
Net income .................................. $ 6,197 $ 2,789
============ ============
Net income per common share:
Basic ....................................... $ 0.32 $ 0.15
============ ============
Diluted ..................................... $ 0.31 $ 0.15
============ ============
Average common and common equivalent shares outstanding:
Basic ....................................... 19,404,923 18,553,073
============ ============
Diluted ..................................... 20,197,089 19,217,544
============ ============
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
December 29, September 30,
2001 2001
------------ -------------
ASSETS
Current assets:
Cash and equivalents ................................................................ $ 13,715 $ 36,561
Marketable securities ............................................................... 20,251 13,812
Accounts receivable, less allowances of $8,070
at December 29, 2001 and $7,151 at September 30, 2001 ............................ 75,253 75,295
Deferred income taxes ............................................................... 7,298 6,655
Other current assets ................................................................ 20,461 15,819
--------- ---------
Total current assets ......................................................... 136,978 148,142
Property, plant and equipment, net ..................................................... 36,026 36,016
Marketable securities .................................................................. 24,410 18,400
Intangible assets ...................................................................... 23,078 17,027
Goodwill ............................................................................... 49,269 34,142
Deferred software development costs, net ............................................... 17,195 17,144
Other assets ........................................................................... 11,228 13,943
--------- ---------
Total assets .................................................................. $ 298,184 $ 284,814
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 4,980 $ 7,272
Accrued compensation ................................................................ 22,377 26,932
Accrued expenses and other current liabilities ...................................... 11,334 16,073
Deferred professional service revenues .............................................. 30,235 29,740
Deferred maintenance revenues ....................................................... 63,280 57,053
--------- ---------
Total current liabilities ..................................................... 132,206 137,070
Deferred maintenance revenues .......................................................... 10,842 12,054
Other liabilities ...................................................................... 4,398 4,674
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares,
no shares issued and outstanding ................................................. -- --
Common Stock, par value $.01 per share: authorized 50,000,000 shares, 19,700,501 and
19,154,138 shares issued at December 29, 2001 and September 30, 2001, respectively 197 192
Additional paid-in capital .......................................................... 31,441 20,548
Retained earnings ................................................................... 120,545 114,348
Cost of Treasury Stock (296 shares and 95,787 shares
at December 29, 2001 and September 30, 2001) ...................................... (13) (2,588)
Accumulated other comprehensive income (loss):
Foreign currency translation ...................................................... (1,593) (1,796)
Net unrealized gain on available-for-sale investments ............................. 161 312
--------- ---------
(1,432) (1,484)
Total shareholders' equity .................................................... 150,738 131,016
--------- ---------
Total liabilities and shareholders' equity .................................... $ 298,184 $ 284,814
========= =========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
---------------------------
December 29, December 30,
2001 2000
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Operating activities:
Net income .............................................................. $ 6,197 $ 2,789
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation .................................................... 2,166 2,016
Amortization of intangible assets ............................... 643 1,734
Amortization of deferred software development costs ............. 2,095 1,919
Provision for deferred income taxes ............................. (206) (264)
Changes in certain operating assets and liabilities:
Accounts receivable, net .................................... 8,164 6,711
Deferred maintenance revenue ................................ (626) (522)
Deferred professional service revenue ....................... (826) (24)
Accounts payable, accrued compensation
and other liabilities ................................... (9,506) (950)
Taxes payable ............................................... (6,634) (1,748)
Other ....................................................... 2,806 1,854
Tax benefit from exercise of stock options ...................... 7,144 1,670
-------- --------
Net cash and equivalents provided by operating activities 11,417 15,185
Investing activities:
Purchase of property, plant and equipment ............................... (2,095) (1,677)
Capitalization of software development costs ............................ (2,783) (2,813)
Increase in marketable securities ....................................... (12,449) (9,993)
Acquisitions of businesses, net of cash acquired ........................ (23,264) (2,056)
-------- --------
Net cash and equivalents used in investing activities ... (40,591) (16,539)
Financing activities:
Net proceeds from exercise of stock option and employee stock
purchase plans ...................................................... 10,955 3,055
Purchase of treasury stock .............................................. (2,623) (3,800)
Investment in call option ............................................... (2,000) --
-------- --------
Net cash and equivalents used in financing activities .. 6,332 (745)
Effect of exchange rate changes on cash and equivalents ...................... (4) 95
-------- --------
Decrease in cash and equivalents ............................................. (22,846) (2,004)
Cash and equivalents at the beginning of the period .......................... 36,561 23,201
-------- --------
Cash and equivalents at the end of the period ................................ $ 13,715 $ 21,197
======== ========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - General
The accompanying unaudited condensed consolidated financial statements include
all adjustments, consisting of normal recurring accruals that management of
Kronos Incorporated (the "Company") considers necessary for a fair presentation
of the Company's financial position and results of operations as of and for the
interim periods presented pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures in these financial
statements are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended September
30, 2001. The results of operations for the three months ended December 29, 2001
are not necessarily indicative of the results for a full fiscal year. Certain
reclassifications have been made in the accompanying consolidated financial
statements in order to conform to the fiscal 2002 presentation.
NOTE B - Fiscal Quarters
The Company utilizes a system of fiscal quarters. Under this system, the first
three quarters of each fiscal year end on a Saturday. However, the fourth
quarter of each fiscal year will always end on September 30. Because of this,
the number of days in the first quarter (90 days in fiscal 2002 and 91 days in
fiscal 2001) and fourth quarter (93 days in fiscal 2002 and 92 days in fiscal
2001) of each fiscal year varies from year to year. The second and third
quarters of each fiscal year will be exactly thirteen weeks long. This policy
does not have a material effect on the comparability of results of operations
between quarters.
NOTE C - Goodwill and Other Intangible Assets - Adoption of Statements 141 and
142
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets" (the "Statements"). Under the new rules,
goodwill (and intangible assets deemed to have indefinite lives) will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives.
For acquisitions completed prior to June 30, 2001, the Company has applied the
new rules on accounting for business combinations and goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. For
acquisitions completed after June 30, 2001, the Company has applied the new
rules beginning in the fourth quarter of fiscal 2001. The Company will perform
the first of the required impairment tests of goodwill as of October 1, 2001
prior to March 30, 2002, and has not yet determined what the effect of these
tests will be on earnings and financial position of the Company.
The following table presents the impact of the new standards related to goodwill
amortization (and related tax effects) on net income and earnings per share, as
if they had been in effect for the three months ended December 30, 2000.
(in thousands, except per share data)
Three Months Ended
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December 29, 2001 December 30, 2000
----------------- -----------------
Reported net income $ 6,197 $2,789
Add back: Goodwill amortization - 825
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Adjusted net income $ 6,197 $3,614
======= ======
Basic earnings-per-share:
Reported net income $0.32 $0.15
Goodwill amortization - 0.04
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Adjusted net income $0.32 $0.19
===== =====
Diluted earnings-per-share:
Reported net income $0.31 $0.15
Goodwill amortization - 0.04
----- -----
Adjusted net income $0.31 $0.19
===== =====
Acquired intangible assets subject to amortization are presented in the
following table. During the quarter ended December 29, 2001, the Company
completed various acquisitions as described in Note D. The following tables have
been prepared on the basis of assumptions relating to the allocation of
consideration paid for the assets and liabilities of the Company's acquisitions
(see Note D) based on preliminary estimates. The actual allocation of the amount
of consideration may differ from that reflected in this table after a valuation
and other procedures have been completed:
(in thousands)
As of December 29, 2001
---------------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Customer related $21,154 $5,207
Maintenance relationships 5,792 84
Non-compete agreements and other 2,691 1,268
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$29,637 $6,559
======= ======
For the three months ended December 29, 2001, amortization expense for
intangible assets was $0.6 million. The estimated annual amortization expense
for intangible assets for the current and next five fiscal years is as follows
(in thousands):
Fiscal Year Ending Estimated annual
September 30, amortization expense
------------------ --------------------
2002 $2,978
2003 3,018
2004 2,641
2005 2,200
2006 2,167
2007 2,152
NOTE D - Acquisitions
On November 29, 2001, the Company completed the acquisition of certain assets
and the ongoing business operations of NW Micro-Technics, Inc. (NWM), the former
Oregon-based Kronos dealer. The aggregate purchase price was not material to the
Company's financial position. The results of NWM's operations, which are not
material to the Company's results of operations, have been included in the
consolidated financial statements since that date. NWM was engaged in the sale
and service of employee time and attendance, employee scheduling, data
collection and labor management hardware and software systems, including the
resale of the Company's products through a dealer relationship. As a result of
the acquisition, the Company gains access to existing and prospective customers
in the northwestern United States region through its direct sales and service
organizations, as well as access to the existing maintenance revenue stream from
NWM customers.
On December 28, 2001, the Company completed the acquisition of certain assets
and the ongoing business operations of the Integrated Software Business of
SimplexGrinnell's Workforce Solutions Division (SimplexGrinnell). The aggregate
purchase price was $21.7 million in cash. The results of SimplexGrinnell's
operations have been included in the consolidated financial statements since
that date and were immaterial to the Company's results of operations in the
current quarter. SimplexGrinnell was engaged in the development, sales and
support of integrated workforce management software solutions. As a result of
the acquisition, the Company expects to increase its presence in the mid-market
sector, which includes companies with between 100 and 1,000 employees.
The transaction was accounted for under the purchase method of accounting and
accordingly, the assets and liabilities acquired were recorded at their
estimated fair values at the effective date of the acquisition. The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of the acquisition. The following tables have
been prepared on the basis of assumptions relating to the allocation of
consideration paid for the assets and liabilities of SimplexGrinnell based on
preliminary estimates. The actual allocation of the amount of consideration may
differ from that reflected in this table after a valuation and other procedures
have been completed.
(in thousands)
At December 28, 2001
--------------------
Accounts receivable $7,563
Intangible assets 6,151
Goodwill 13,690
Other assets 842
---
Total assets acquired 28,246
Deferred professional services
revenue (1,195)
Deferred maintenance revenue (5,401)
-------
Total liabilities assumed (6,596)
-------
Net assets acquired $21,650
=======
Due to the timing of the SimplexGrinnell acquisition, the Company has not
finalized the allocation of the purchase price.
The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of SimplexGrinnell had taken
place at the beginning of the periods presented. The following table has been
prepared on the basis of estimates and assumptions available at the time of this
filing that the Company and SimplexGrinnell believe are reasonable under the
circumstances.
(in thousands, except per share data)
Three Months Ended
----------------------------------------------
December 29, 2001 December 30, 2000
----------------- -----------------
Total revenues $82,431 $71,381
Net income 5,034 781
Earnings per share - basic 0.26 0.04
Earnings per share - diluted 0.25 0.04
The unaudited pro forma results of operations are for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of the periods presented or the results
which may occur in the future.
NOTE E - Comprehensive Income
For the three months ended December 29, 2001 and December 30, 2000 comprehensive
income consisted of the following (in thousands):
Three Months Ended
-------------------------------
December 29, December 30,
2001 2000
------------ ------------
Comprehensive income:
Net income $6,197 $2,789
Cumulative translation adjustment 203 125
Unrealized (loss) gain on
available-for-sale securities (151) 206
------- ------
Total comprehensive income $6,249 $3,120
======= ======
NOTE F - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share data):
Three Months Ended
-------------------------------
December 29, December 30,
2001 2000
------------ ------------
Net income (in thousands) $ 6,197 $ 2,789
=========== ===========
Weighted-average shares 19,404,923 18,553,073
Effect of dilutive securities:
Employee stock options 792,166 664,471
----------- -----------
Adjusted weighted-average shares
and assumed conversions 20,197,089 19,217,544
=========== ===========
Basic earnings per share $ 0.32 $ 0.15
=========== ===========
Diluted earnings per share $ 0.31 $ 0.15
=========== ===========
NOTE G - Stock Split
On October 25, 2001, the Company's Board of Directors approved a three-for-two
stock split effected in the form of a 50% stock dividend. This stock dividend
was paid on November 15, 2001 to stockholders of record as of November 5, 2001.
Accordingly the presentation of shares outstanding and amounts per share have
been restated for all periods presented to reflect the split. The par value of
the additional shares was transferred from additional paid-in capital to Common
Stock.
NOTE H - New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. This statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for
the Company October 1, 2002, and early adoption is allowed. The Company has not
currently determined what effect, if any, the requirements of SFAS No. 144 will
have on its earnings and financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This discussion includes certain forward-looking statements about Kronos'
business and its expectations, including statements relating to revenues derived
from prior acquisitions, revenue growth rates and gross margin, operating
expenses, management of dealer channels, future acquisitions and available cash,
investments and operating cash flow. Any such statements are subject to risk
that could cause the actual results to vary materially from expectations. For a
further discussion of the various risks that may affect Kronos' business and
expectations, see "Certain Factors That May Affect Future Operating Results" at
the end of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Revenues. Revenues for the first quarter of fiscal 2002 were $75.9 million
as compared to $65.0 million for the first quarter of the prior year. Revenue
growth in the first quarter of fiscal 2002 was 17% as compared to 1% in the
first quarter of fiscal 2001. The revenue growth rate experienced in the first
quarter of fiscal 2002 was primarily attributable to the continued increase in
demand for Kronos' services. In addition, revenues, particularly service
revenues, were favorably impacted by acquisition of businesses over the
preceding four quarters. The revenue growth rate experienced in first quarter of
fiscal 2001 was nominal. On December 28, 2001, Kronos acquired certain assets
and the ongoing business operations of the Integrated Software Business of
SimplexGrinnell's Workforce Solutions Division (SimplexGrinnell). The revenues
and results of operations related to the acquisition are immaterial to the
current quarter. Kronos anticipates the acquisition to generate between $12.0 to
$15.0 million in incremental revenue and have a neutral effect on earnings over
the remainder of the year.
Product revenues for the quarter increased 4% to $35.2 million as compared
to $34.0 million and a product revenue decline of 6% in the first quarter of
fiscal 2001. The product revenue growth experienced in the first quarter of
fiscal 2002 was principally due to the growth in sales of Kronos' software
solutions, which was partially offset by a decline in the sales of Kronos'
hardware products. The overall product revenue growth is attributable to demand
for platform and capacity upgrades from existing customers as well as product
demand from new customers and customers obtained from acquisition of businesses.
Product revenues declined in the first quarter of fiscal 2001 principally due to
lower than anticipated revenues from Kronos' independent dealer channel. The
decline was attributable to the increased sophistication of Kronos' products and
the related heightened need for pre-sales technological support and other sales
support. During the past year Kronos has expended resources to provide sales
support to the dealer channel and has acquired some under-performing dealers.
Kronos anticipates continuing to expend resources to assist the dealer channel
in the short term and to increase Kronos' emphasis on direct sales in the longer
term.
Service revenues for the first quarter of fiscal 2002 increased to $40.6
million as compared to $31.0 million in the first quarter of fiscal 2001.
Service revenues increased 31% in the first quarter of fiscal 2002 as compared
to 9% in the first quarter of fiscal 2001. Excluding the effect of incremental
service revenues from acquisition of businesses in the preceding four quarters,
service revenues would have increased 21%. In addition to the acquisition of
businesses, the growth in service revenues in the first quarter of fiscal 2002
reflects an increase in the level of professional services accompanying new and
upgrade sales as well as an increase in maintenance revenue from the expansion
of the installed base and the level of services sold to the installed base. The
growth in service revenues in the first quarter of fiscal 2001 principally
reflects an increase in maintenance revenue from expansion of the installed base
and, to a lesser extent, incremental maintenance revenues resulting from Kronos'
acquisitions of various dealer territories.
Gross Profit. Gross profit as a percentage of revenues was 62% in the first
quarter of fiscal 2002, increasing from 60% in the comparable period of the
prior year. The improvement in gross profit in the first quarter of fiscal 2002
was attributable to an increase in service gross profit, which was partially
offset by a decrease in product gross profit. Product gross profit as a
percentage of product revenues was 76% in the first quarter of fiscal 2002
compared to 77% in the first quarter of the prior year. This decrease in product
gross profit is primarily related to higher royalty costs and higher production
costs due to lower hardware sales volume, but is partially offset by a higher
proportion of software sales that typically carry a higher gross profit. Service
gross profit as a percentage of service revenues was 49% in the first quarter of
fiscal 2002, compared to 42% in the first quarter of the prior year. The
improvement in service gross profit is attributable to increased productivity in
the service organization. The improvement in productivity is the result of
leveraging investments in service systems to more effectively manage the
resources required to deliver professional services and customer support.
Although over the remainder of the year gross profit as a percentage of revenue
is expected to increase above the gross profit percentage achieved in the
current quarter, management anticipates some near term deterioration of margins
as Kronos integrates the SimplexGrinnell operations.
Net Operating Expenses. Net operating expenses as a percentage of revenues
were 49% and 54% in the first quarter of fiscal 2002 and 2001, respectively. The
increase in operating expenses was primarily due to incremental costs to support
higher sales volume and the conversion of dealer operations to direct sales
operations. Sales and marketing expenses as a percentage of revenues were 33%
and 34% in the first quarter of fiscal 2002 and 2001, respectively. The decrease
in sales and marketing expense as a percent of revenue was attributable to our
leveraging our investment in infrastructure to generate higher sales volumes.
Engineering, research and development expenses as a percentage of revenues
declined to 10% in the first quarter of fiscal 2002 as compared to 12% in the
first quarter of the prior year due to higher sales volume. Engineering expenses
of $7.9 million in the first quarter of fiscal 2002 and 2001, respectively, are
net of capitalized software development costs of $2.6 million in each period.
General and administrative expenses as a percentage of revenues were 6% in the
first quarter of fiscal 2002 and 2001. Amortization of intangible assets as a
percentage of revenues was 1% and 3% in the first quarter of fiscal 2002 and
2001, respectively. The decrease in amortization is the result of the
elimination of goodwill amortization due to Kronos' adoption of Statements of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets" effective October 1,
2001. Other income, net is principally attributable to interest income earned
from Kronos' cash as well as investments in its marketable securities and lease
portfolio. Management anticipates that operating expenses as a percent of
revenues will increase in the near term as Kronos integrates the
SimplexGrinnell operations.
Income Taxes. The provision for income taxes as a percentage of pretax
income was 35% in the first quarter of fiscal 2002 and 2001. Kronos' effective
income tax rate may fluctuate between periods as a result of various factors,
none of which is material, either individually or in the aggregate, to the
consolidated results of operations.
Newly Issued Accounting Standards. In June 2001, the Financial Accounting
Standards Board (the "FASB") issued SFAS 141 and SFAS 142. Under the new rules,
goodwill (and intangible assets deemed to have indefinite lives) will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives.
For acquisitions completed prior to June 30, 2001, the Company applied the
new rules on accounting for business combinations and goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. For
acquisitions completed after June 30, 2001, Kronos applied the new rules
beginning in the fourth quarter of fiscal 2001. On a proforma basis, Kronos
would have realized an increase in net income of $0.8 million, or $0.04 per
diluted share, if these new standards had been applied to the first quarter of
fiscal 2001. During the second quarter of fiscal 2002, Kronos will perform the
first of the required impairment tests of goodwill as of October 1, 2001 and has
not yet determined what the effect of these tests will be on earnings and
financial position.
In October 2001, the FASB issued Statements of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment of long-lived assets and for long-lived assets to be disposed
of. This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. Kronos has not currently determined
what effect, if any, the requirements of SFAS 144 will have on its earnings and
financial position.
Liquidity and Capital Resources
Working capital as of December 29, 2001, amounted to $4.8 million as
compared to $11.1 million at September 30, 2001. During the first quarter of
fiscal 2002, working capital was reduced as Kronos used available cash of $23.3
million to complete acquisitions of businesses with working capital of
approximately $1.9 million. Cash, cash equivalents and marketable securities
amounted to $58.4 million as of December 29, 2001 and $68.8 million as of
September 30, 2001. The decline in cash, cash equivalents and marketable
securities in the first quarter of fiscal 2002 is primarily attributable to cash
used in the Company's acquisitions in that quarter.
Cash generated from operations amounted to $11.4 million in the first
quarter of fiscal 2002 as compared to $15.2 million in the first quarter of
fiscal 2001. The decrease in cash generated from operations is primarily
attributable to the payment of bonuses and commissions, the payment of accounts
payable as well as the payments of liabilities associated with a previous
acquisition, partially offset by an increase in net income and a decrease in
accounts receivable. Cash used for property, plant and equipment was $2.1
million in the first quarter of fiscal 2002 compared to $1.7 million in the same
period of fiscal 2001. Kronos' use of cash for the acquisition of businesses in
the first quarter of fiscal year 2002 was principally related to the
acquisitions of specified assets and/or businesses of Kronos' dealers and/or
other providers of labor management solutions. These acquisitions did not have a
material impact on revenues or results of operations in the three months ended
December 29, 2001. Kronos is assessing several acquisition opportunities that
may be completed over the next twelve months, although there can be no assurance
that these acquisitions will be completed. Excess cash reserves not required for
operations, investments in property, plant and equipment or acquisitions are
invested in marketable securities. Marketable securities increased by $12.5
million in the first quarter of fiscal 2002 compared to an increase of $10.0
million in the first quarter of fiscal 2001.
Under Kronos' stock repurchase program, Kronos repurchased 22,500 common
shares in the first quarter of fiscal 2002 at a cost of $0.6 million compared to
91,500 common shares at a cost of $2.3 million for the same period in the prior
year. The common shares repurchased under the program are used for Kronos'
employee stock option plans and employee stock purchase plan. Cash provided by
operations was sufficient to fund investments in capitalized software
development costs, property, plant and equipment and stock repurchases. Kronos
believes it has adequate cash and investments and operating cash flow to fund
its investments in property, plant and equipment, software development costs,
cash payments related to acquisitions, if any, and any additional stock
repurchases for the foreseeable future.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in this Quarterly
Report on Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Kronos desires to
take advantage of the safe harbor provisions of the Act and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all forward looking statements that involve risks
and uncertainties.
Kronos' actual operating results may differ from those indicated by forward
looking statements made in this Quarterly Report on Form 10-Q and presented
elsewhere by management from time to time because of a number of factors
including the potential fluctuations in quarterly results, timing and acceptance
of new product introductions by Kronos and its competitors, the ability to
attract and retain sufficient technical personnel, competitive pricing pressure,
the dependence on Kronos' time and attendance product line, and the dependence
on alternate distribution channels and on key vendors, as further described
below and in Kronos' Annual Report on Form 10-K for the fiscal year ended
September 30, 2001, which are specifically incorporated by reference herein.
Potential Fluctuations in Quarterly Results. Kronos' quarterly operating
results may fluctuate as a result of a variety of factors, including the
purchasing patterns of its customers, mix of products and services sold, the
ability of Kronos to effectively integrate acquired businesses into Kronos'
operations, the timing of the introduction of new products and product
enhancements by Kronos and its competitors, the strategy employed by Kronos to
enter the Human Resource (HR)/Payroll market, market acceptance of new products,
competitive pricing pressure and general economic conditions. Kronos
historically has realized a relatively larger percentage of its annual revenues
and profits in the fourth quarter and a relatively smaller percentage in the
first quarter of each fiscal year, although there can be no assurance that this
pattern will continue. In addition, while Kronos has contracts to supply systems
to certain customers over an extended period of time, substantially all of
Kronos' product revenue and profits in each quarter result from orders received
in that quarter. If near-term demand for Kronos' products weakens or if
significant anticipated sales in any quarter do not close when expected, Kronos'
revenues for that quarter will be adversely affected. Kronos believes that its
operating results for any one period are not necessarily indicative of results
for any future period.
Product Development and Technological Change. Continual change and
improvement in computer software and hardware technology characterize the
markets for frontline labor management systems. Kronos' future success will
depend largely on its ability to enhance the capabilities and increase the
performance of its existing products and to develop new products and interfaces
to third party products on a timely basis to meet the increasingly sophisticated
needs of its customers. Although Kronos is continually seeking to further
enhance its product offerings and to develop new products and interfaces,
including products for the HR/Payroll market there can be no assurance that
these efforts will succeed, or that, if successful, such product enhancements or
new products will achieve widespread market acceptance, or that Kronos'
competitors will not develop and market products which are superior to Kronos'
products or achieve greater market acceptance.
Dependence on Time and Attendance Product Line. To date, more than 90% of
Kronos' revenues have been attributable to sales of time and attendance systems
and related services. Although Kronos has announced its intention to enter the
licensed HR/Payroll market this fiscal year, Kronos expects that its dependence
on the time and attendance product line for revenues will continue for the
foreseeable future. Competitive pressures or other factors could cause Kronos'
time and attendance products to lose market acceptance or experience significant
price erosion, adversely affecting the results of Kronos' operations.
Dependence on Alternate Distribution Channels. Kronos markets and sells its
products through its direct sales organization, independent dealers and its OEM
partner, ADP, Inc ("ADP"). In the first quarter of fiscal 2002, approximately
15% of Kronos' revenue was generated through sales to dealers and ADP.
Management does not anticipate that its intention to enter the HR/Payroll market
will have a negative impact on its relationship with ADP. However, a reduction
in the sales efforts of Kronos' major dealers and/or ADP, or termination or
changes in their relationships with Kronos, could have a material adverse affect
on the results of Kronos' operations.
Competition. The frontline labor management industry and the HR/Payroll
market are highly competitive. The number of competitors is also increasing as
applications and systems providers such as human resources management, payroll
processing and enterprise resource planning (ERP), enter these markets.
Technological changes such as those allowing for increased use of the Internet
have also resulted in new entrants into the markets. Although Kronos believes it
has core competencies that are not easily obtainable by competitors, maintaining
Kronos' technological and other advantages over competitors will require
continued investment by Kronos in research and development and marketing and
sales programs. There can be no assurance that Kronos will have sufficient
resources to make such investments or be able to achieve the technological
advances necessary to maintain its competitive advantages. Increased competition
could adversely affect Kronos' operating results through price reductions and/or
loss of market share.
Events of September 11, 2001. No Kronos employees were lost or injured, and
no Kronos properties or records were damaged, as a result of the terrorist
attacks that occurred in the United States on September 11, 2001. However, at
this time, it is not possible to predict the long-term impact of these events,
or the domestic and foreign response, on either our industry as a whole or on
our operations and financial condition in particular.
Attracting and Retaining Sufficient Technical Personnel for Product
Development, Support and Sales. Kronos has encountered intense competition for
experienced technical personnel for product development, technical support and
sales and expects such competition to continue in the future. Any inability to
attract and retain a sufficient number of qualified technical personnel could
adversely affect Kronos' ability to produce, support and sell products in a
timely manner.
Protection of Intellectual Property. Kronos has developed, and through its
acquisitions of businesses, acquired, proprietary technology and intellectual
property rights. Kronos' success is dependent upon its ability to further
develop and protect its proprietary technology and intellectual property rights.
Kronos seeks to protect products, software, documentation and other written
materials primarily through a combination of trade secret, patent, trademark and
copyright laws, confidentiality procedures and contractual provisions. While
Kronos has attempted to safeguard and maintain its proprietary rights, it is
unknown whether Kronos has been or will be successful in doing so.
Despite Kronos' efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of its products or obtain and use
information that is regarded as proprietary. Policing unauthorized use of
Kronos' products is difficult. While Kronos is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem, particularly in foreign countries where the laws may
not protect proprietary rights as fully as in the United States. Kronos can
offer no assurance that it can adequately protect its proprietary rights or that
its competitors will not reverse engineer or independently develop similar
technology.
Infringement of Intellectual Property Rights. Kronos cannot provide
assurance that others will not claim that Kronos developed or acquired
intellectual property rights are infringing on their intellectual property
rights or that Kronos does not in fact infringe on those intellectual property
rights.
Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of Kronos' management and key personnel
from business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require Kronos to enter into
costly royalty or license agreements, and in this event, Kronos may not be able
to obtain royalty or license agreements on acceptable terms, if at all. Kronos
may also be subject to significant damages or an injunction against the use of
its products. A successful claim of patent or other intellectual property
infringement against Kronos could cause immediate and substantial damage to its
business and financial condition.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1(1) Asset Purchase Agreement, dated as of December 28, 2001 by and
among the Registrant and SimplexGrinnell L.P., Tyco International
Canada Ltd., Simplex International Pty. Ltd., and ADT Services A.G.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 25, 2001 announcing a
3-for-2 stock split of the Registrants common stock, par value $0.01 per
share, in the form of a 50% common stock dividend.
(1) Confidential treatment requested as to certain portions thereof.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INCORPORATED
By /s/ Paul A. Lacy
-----------------------------
Paul A. Lacy
Vice President of Finance
and Administration
(Duly Authorized Officer and
Principal Financial Officer)
February 11, 2002
KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number Description
10.1(1) Asset Purchase Agreement, dated as of December 28, 2001 by and
among the Registrant and SimplexGrinnell L.P., Tyco International
Canada Ltd., Simplex International Pty. Ltd., and ADT Services A.G.
(1) Confidential treatment requested as to certain portions thereof.